Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Good morning, everybody. This is Gerard Cassidy from RBC Capital Markets. Our next fireside chat is with Truist Financial. Joining us is Kelly King, Chairman and CEO; and as well as their Chief Financial Officer, Daryl Bible. As many of you know, Truist is the combination of the old BB&T, SunTrust. That was a transformational merger for those 2 companies. Possibly, it will go down as one of the biggest transformational mergers of all time. So we're very pleased to have one of the leading bankers in the United States with us. So Kelly, Daryl, thank you for joining us.

Thanks, Gerard. Great to be with you.

Maybe we could start off, if you would, Kelly, obviously, last year was an incredible year for all of us, unprecedented. And aside from the obvious COVID surprise, can you share with us what other surprises that you saw last year, both for Truist, but also for you as a CEO of such a large corporation and how you guys managed through that?

Yes. Well, obviously, it was a really incredibly interesting and challenging and, in many regards, totally surprising year. But I think one of the things that in a really positive way surprised me more than anything else was how resilient our clients and our teammates were. We had to change. About 35,000 of our teammates had to move from on-site to working from home literally within a few days. And they did that. They did it extraordinarily well. And then our clients had to adjust from branches being opened to branches being closed, only could use the drive-in window. So massive changes, but everybody responded in an extremely positive way. And it was very, very reassuring. It just proves the resilience of the American people. That's what I find to be very, very encouraging. I also was -- I had great expectation, but I was positively surprised how well our cultural activation went. That was job #1 in terms of making sure that our culture is fully aligned and fully understood throughout the organization. We did a lot of town halls. We did a lot of conversations. Even as COVID kicked in, we did a lot of virtual conversations. And the receptivity and the embracing of our culture has just been incredibly positive and reassuring. And so that was another big standout. And then I would say, Gerard, I think for myself, I was just really impressed with how well our people were able to respond to the PPP challenge, the Paycheck Protection Program, where we literally had to stand up about 5,000 people overnight to be able to process these applications. We only had a few days literally from when we got the rules to when we had to start taking applications. And we were able to do that extremely well. So I would say, overall, the big surprise in a very, very positive way was how resilient, positive, enthusiastic, supportive, accommodative and team-oriented everybody responded.

Very good. Kelly, we all know that banks are products of their environment. And with that in mind, can you share with us what you're seeing across your franchise, which, arguably, because you're in the fastest-growing parts of the country may be best positioned to capture the resurgence and growth in this country's economy. So any highlights that you can give us on what you folks are seeing down the franchise in terms of macroeconomic growth that's been showing up in the last 3 to 5 months?

Yes. I would say one of the things that's really important to note upfront is this is what I would call a bifurcated economy. The very smallest micro businesses have been hit the hardest. They are, in many cases, still really struggling, trying to figure out how to adapt their strategies and their tactics to be able to survive in this environment. On the other hand, if you look at the -- I'm going to just say midsized businesses on up to the very largest businesses, they are actually doing very well. They've responded quickly. They had strong balance sheets. They adjusted. They control their expenses, and then now they are really back pretty strong with some exceptions. For example, manufacturing is very strong. Housing is really, really strong. Auto is very, very strong. And so those categories are doing really, really well. On the other hand, we see hospitality, as you would expect to be, not doing as well. And so it's a very interesting bifurcated and then segmented type of economic scenario. But in the aggregate, it is doing much better today than I think most of us would have guessed 6 months or so ago. And then if I look forward, Gerard, I believe and I'm no economist, but I believe as we head into the summer and the fourth quarter, we're going to see an economy that is substantially more robust than most people think. And here's why. Because there was really nothing wrong with this economy when we shut it down. And if you go back into late '80s when we had the commercial real estate bubble, that was a big asset-driven bubble and correction. Then in 2000, we had the technology bubble. In 2008, we had the residential bubble correction. There was no correction in order here. There were no excesses, no bubbles, we just shut it down. And so for that reason, there's nothing structurally wrong with the economy, which means that it can come back faster, especially with the stimulus that we're seeing today. So I think we have reason to be very encouraged, very optimistic. I still worry about and concerned about the micro businesses. I think they need all the help we can give them. But others are doing very well. And you hear comments all the time from our clients say, "Hey, it's time to get on with it." Pipelines are increasing, applications increasing, pretty robust.

Very good. Well, we share your sentiment that we think the economy is going to surprise to the upside in the upcoming year as well. Maybe pivoting over to the merger. Obviously, big deal. You guys have been working very diligently on integration from the day this was announced. Can you give us an update on the time lines, any major milestones that are coming up that you guys are focused on? And any surprises that you've seen along the way in putting these 2 companies together?

Yes. Actually, it's gone extraordinarily well relative to the environment. We started out early on. Our primary focus was on cultural activation. We did about 35 town halls and went out and visited when we could. And at the very end, we had to do it virtually, but we went out and spent a lot of time with our teammates. The culture integration and acceptance has gone really, really well. And I had great expectations, but it has exceeded those expectations. So feel great about that. Then we focused on our branding. Obviously, we introduced a new name, Truist. And there was a huge amount of work that went into making that happen, and that has gone extremely well. The feedback we're getting so far with regard to teammates, those closest to the company and even outside as we begin to spread the exposure of Truist is going really, really well. And then we've been working hard, believe it or not, already on conversions. This is a bit of a misunderstanding. Some people think that the conversion is not going to happen until the first half of '22, which was a slight pushback from the fall of '21. But actually, there's a lot of conversion activity that is already going on and is going on. We've already had our capital markets conversion. Just a couple of weekends ago, we had our brokerage conversion. We're coming right up soon on our front-end mortgage conversion. Our wealth conversion's right around the corner. As we head into the summer and the fall, we got a big, huge amount of "conversion work" going on with regard to our digital, what we call digital first, our conversion activity. Into the fall, the BB&T class will be fully converted over to the Truist digital platform. And so really, by the end of the year, most of the heavy lifting will be done in terms of getting ready for the final conversion, which will be in the first half of '22 when we do all the final branch consolidations and change designs. I just point that out, Gerard, because there's a feeling on the part of investors sometimes that the risk is going to be really high all the way up till the day we pull the size down and change the branches. That's really not true. The risk goes down as all of these conversions are occurring. And by the time we get to the actual day of the conversion, the risk will be already dramatically mitigated. And so that's why '21 is so important as we go along, but we are on track. We see nothing now that will stand in the way of the time line that we laid out. And I think it's going to be very smooth.

It's interesting, Kelly, because you've been acquiring banks for your entire career. And can you compare this in terms of the success that you're having? Is it even better than some of the -- because many of your deals, like the Colonial Bancorp deal, for example, with the FDIC-assisted deal you guys did seem to go very smoothly. Does that give you confidence that this one is going as well as some of your past deals?

To be fairly honest, I think it's going better than any of the other past deals, and here's why. Most of the deals, as you all know, have been where we were buying smaller companies. And when a large company is buying a small company, there's just a lot of interruption and a lot of change, a lot of product changes. There are a lot of process changes. And you have a lot of employees, teammates who chose to work for a small company don't really want to work for a big company. So when a big company takes over, you get some turnover. Same thing with clients. You have some clients who chose to bank with a small bank and for whatever reason don't want to be with a big bank. So you have some client turnover. In this case, you have 2 large companies that the teammates and the clients have chosen to be with 2 good, large companies. And so the combination in the regard of change from small to big is not -- is just not there. What -- rather the clients and the teammates are seeing is net better. For the teammates, we have a better value proposition because we've been on this path of what we call best of both. We've been picking the very best fringe benefit programs, best training programs, best compensation programs. So it really is better across the board. And same thing for our clients. We pick them the best ecosystems, the best products and services. And in some cases, if neither SunTrust or BB&T had the best, then we'll bring in the third. So we're kind of what I call kind of building a new bank because -- and it's going to be fantastic because it's going to have the best of 2 great banks and some additions from the world that's advanced further the need of BB&T or SunTrust was. And so it's going to be really, really good. And we're really on track to make that happen in the time frame that we described.

Kelly, I'm glad you brought up and emphasized the differences when you acquire a small bank and the disruptions that happened both from employees and customers because I think we, as investors, sometimes don't realize how meaningful that is, how different it is. And so you just don't get that just as much of a disruption when you put 2 big banks together like you guys have done. I couldn't agree with you more. Obviously, Kelly, you've been in the banking business a number of years, and your career has spanned an incredible transformation in the banking industry since the early '80s through today. Can you kind of look at your crystal ball, if you would, over the next 5 to 10 years? And what do you think you envision in terms of the landscape? Are we going to have some maybe national banks that could compete against the big universal banks that you guys compete against already? How fintech may play into this competition? I don't know if you saw this morning, but SoFi announced they're buying a small OCC-chartered bank on the West Coast as a way of trying to leapfrog into the banking business as a fintech. But any color you can give us on your crystal ball for the next 5 to 10 years?

Well, I think it's going to be a pretty active period because the world has really changed over the last 7 to 10 years and has been changing at an accelerating pace. And that really is because of the dramatic increase in digital transformation. And it's really kind of what I call the Amazon effect. I mean,the world change when people went through a substantial paradigm shift where they basically say, "I want what I want when I want it right here right now." That was just a giant sea change, paradigm change. And so in order to comply with that, that necessitated a dramatic increase in technological capabilities because so much of the demand on the clients' part now, not just for banking, but all of retail is to have that easy fingertip access availability to all of those services. And so that is going to cause -- has already caused institutions in banking to be able -- I mean, to have to invest dramatically in the pure technology but also something what people don't often see is the marketing of the technology. And so just because you have great technology, it doesn't mean you're necessarily going to be able to go toe to toe with some of the very largest institutions if they're spending a lot more money on marketing and advertising and giveaway for opening new accounts and so forth. There was a time back before we announced our merger that really informed Bill Rogers and myself about the need for us to do our combination. And that was we had really good technology. In fact, the study showed still the very largest institutions, the management institutions were beating us on the Street because perception is reality. So they were spending so much more money on marketing what they had that much of the public didn't believe that we had products and services that were on par. So therefore, we needed more scale not just to continue to invest in technology, but to build and market the technology, which we now have because, in our marketplaces, we are as large or larger than most of the very largest institutions. We have weighted average #3 total market share in all the markets that we serve. And so in our markets, we have the technology. We can afford to invest in the marketing in our markets. They may be investing in marketing all around the country and all around the world. We're investing in our markets, and so we can go toe to toe with them. So we are at scale now. We can compete very effectively with them and are doing so every day. But I think that for the institutions that are not at that place yet, they're going to need to find a way to be able to invest into actual technology and be able to do the marketing to be able to make the perception of the capabilities real in the minds of the consumers.

Kelly, just following up on the technology comment. I know this is hard. Again, you've been around many decades. The revolution to digital that the industry has gone through, can you compare that to other kind of seminal events, whether it was mainframes going to many computers going to PCs? Is there any way of kind of comparing it? And is this one -- and I know it's front and center to all of us so this may feel bigger. But really, is this transformation even more revolutionary than what we saw in the last 25, 30 years?

Well, it is, Gerard, because it includes the backroom. The mainframe was kind of a background thing. The client didn't know what was going on, didn't care. It was a technological backroom reality. Today, it's backroom in terms of pure capabilities, and it's also the front room in terms of how you interface with the clients. And so today, the real key, we believe, is in what we call T3. So T in our way of thinking about it stands for technology, touch and trust. So the client demands the immediacy availability of technology, but they also want the availability of the trusting touch because sometimes technology just does not work. And as we found out a minute ago, sometimes it just doesn't work. And then sometimes there are complex problems in services in these where the client just wants to talk to a person and be able to get their needs met. So what we think is the real answer today is the seamless integration of technology and touch, so you have a high level of trust. That yields high quality. That yields a high value proposition. So what we do in Truist is embedding that cultural understanding all the way from top to the bottom so that everybody understands that the way we do business around here is that there is a necessary requirement, a demand, if you will, for all of us to play one team ball and to fully integrate technology. It is not either/or. It is both seamlessly integrated together.

Very good. Shifting over, one of the key investment themes that investors are focused on, to no surprise, is credit quality. And you touched on it in your macro comments, Kelly, about the federal government stimulus plans. And we also saw the Federal Reserve come in, in unprecedented fashion last year to smooth out the disruptions in the capital markets. One of the outcomes of this aggressive action by the U.S. government and the Fed has been incredibly strong credit metrics for your bank and your peers in view of an economy that was hit very hard. So maybe to start off with, can you talk to us about how your credit quality, and maybe Daryl wants to chip in as well, how the credit quality performed in the last 12 months? What may have surprised you? And second, there's a lot of talk about releasing loan loss reserves in 2021, what your guys' thoughts are about that as well?

Yes. So if you go back just a year ago, when it all came crashing down, we were all really, really along. I mean nobody had ever seen anything like this. And we -- everybody extrapolated forward that 2 things would happen. One is this would be a dramatic reduction in the economy activity for a long period of time. And number two, as a result of that, there'd be a huge spike up in loan losses. As a result of that, that drove through the CECL methodology huge increases in reserves. And then it wasn't very long at all really even into the next quarter that we saw that it was exaggerated and it was not going to have the impact that we thought. Thank goodness. And so as we look forward, what we're seeing is that the losses are not nearly as high as we projected. I think now, particularly with the efficacy of the vaccines and the distribution of the vaccines, we're seeing confidence begin to be restored. And in fact, the vaccines are getting out. People are less exposed than they were. And the projections according to President Biden is by May, which is right around the corner, every adult in the United States will have availability of the vaccine. So in my own view, as we head into the summer, certainly into the fall, the level of COVID actual exposures and spread is going to go down dramatically. Fear is going to go down dramatically. Confidence is going to rise precipitously. And that will cause people to be ready to go back to living again, traveling and buying and spending and kind of enjoying somewhat of a more normal life. What that will do is it will further reduce the decay in credit portfolios. And then as we look forward, the projection has to be dramatically better in terms of projecting the economy. And look, if things pass tomorrow in the Senate -- I mean back in the House, as we expect, we will have in about 18 months about $5.2 trillion into this economy. That's a lot of money. [ For no phone board ], I'm just telling you, that's a lot of money. And so we don't have any idea the magnitude of the compounding effect on that -- on the economy except, I know this much about economics, it's going to cause dramatic increases in growth. It is going to create impending increases in inflation. It will create impending increases in interest rates, all of which, by the way, are great for banking. And so I think we can forecast that the economy is going for several years, certainly 3 to 5 years is going to be -- and substantially increasing and robust economy. And now down past that, you've got to begin to think about how do you make up for all this excessive spending from now, how do you pay for it? And that's something that we'll all have to worry about 5 to 10 years from now. But for the next 5 years, I personally think economy is going to be very strong, much faster snapback than most people would expect. And it will all be very good for banking. And it will be good for the economy in general.

Very good. And you touched on another key theme that investors have been focused on is interest rates. You highlighted that rising rates, so the steepening in the curve is beneficial to banks. Can you maybe you or Daryl just explore what kind of rate environment would be very positive for Truist? And just what if we see a 2% 10-year government bond by the end of this year, what that implication might be for Truist?

Yes. Gerard, this is Daryl. So what I would say is that we are much more asset sensitive now than we were a year ago. The actions that we've taken over the summer and into the fall, we've seen a dramatic increase in our flow money into the company. And you've seen us put some of that money to work in the fourth quarter. What I would tell you is that we benefit with both short-term rates going up and in the yield curve steepening. The steepening that we've seen today, it's about probably 60 basis points between 2s to 10. That probably gives us 3 to 5 basis points higher core margin, which resulted in higher NII. Goes up another up 2%, you get another 40 basis points or so. That would probably be 2 to 4 more basis points that were to happen. Obviously, we would get more bang for the buck if the Fed were to move at some point, not sure if and when that will happen. But on the short end, we would actually hit a higher multiple, higher earnings and higher NII growth from that standpoint.

Very good. And I might be putting the cart in front of the horse on this one, Kelly. But it's truly amazing, as you described, what we went through in the past 12 months and the federal government's actions as well as the Federal Reserve. I mentioned the outcome of credit was very subdued. If this is the page they're going to use for future recessions of having very aggressive government stimulus and Federal Reserve action, do you think the banking industry could actually become less cyclical and then that's, of course, better for valuations? And again, I know it's putting the cart before the horse to think like this. But what do you think about that on a go-forward basis that maybe the credit cycle that we've all been growing up with and live with has now been maybe just flattened somewhat based upon what the government has done?

Well, that's an interesting question, Gerard, and I think that would be true if you believe that the government could sustain these level of activities, which I do not. I just don't think you can just spend $5 trillion every time you have a blip in the economy. This was not a blip in economy. This is a 100-year, 200-year kind of event. Let's pray we don't have that kind of situation. But if you go back to normal "recessions" like we've all seen many of, you won't be able to see nor do you need that kind of government intervention. Look, corrections are healthy in the sense of washing out excesses in the economy. We don't need to flatten out corrections in the economy. We need to allow them to occur so that we can drain out the excesses. Now when you have a 200-year event like this, we need to do our ploy -- everything has been done. I think we've needed to respond dramatically. We have. You can debate how much, $3 trillion or $5 trillion, but we need to have a dramatic response. But outside of that kind of event, the normal corrections need to occur. Now banking itself can help restrain somewhat the nature of the volatility. What I hope banks will have learned out of these back-to-back dramatic events in just a 10-year period of time is that bad things do happen. The circumstances that you cannot expect do happen. And therefore, strong capital and strong liquidity and strong diversification is really important. And so to the extent that the banking system, and I'm including the nonbank, shadow banks, to the extent that we learn a few of these lessons and apply them, then we won't be supportive of creating the excesses that have occurred in the past. It is the creation of excesses that create the corrections. And the creation of the excesses is, to be honest, sometimes out of greed and sometimes out of chasing short-term profits a bit too much. So I hope and I believe that we will have all learned that we need to be more judicious in terms of doing our part to manage the economy, and therefore, the government will have to do less.

Very good. And then we're coming to the final minutes, maybe here in the last question about capital. Obviously, the deal between the 2 banks, you guys held back on your stock repurchase plans. Obviously, the government or the Federal Reserve suspended for all the big banks last year those plans, have reinstated that now with some limitations. Maybe you could share with us just as the company comes together, we enter '22 and the capital you're going to generate, just how do you allocate that capital on a go-forward basis?

So Gerard, our thinking about capital deployment has really not changed. Truist is focused on, number one, as you would expect, focused on providing capital for client demands, client growth in loans and deposits and other services. Our second focus is on a strong and growing dividend policy. We believe in providing that kind of stability through the return to our shareholders. Our third priority is acquisitions. I'll say to you now that our acquisitions are focused not on big banks. Obviously, we've got our plate full. Our focus is on insurance, which is very attractive for us now, which we would like to expand organically and otherwise and other types of smaller bolt-on transactions, while we're continuing the assimilation of the MOE. And then, of course, there is buybacks, which for us, at the level of performance that we are, which is one of the very top-performing banks in the country today on an adjusted basis and will be, I believe, going forward on a GAAP basis, then you could expect us to accrete a lot of excess capital. And so we will use that for the strategies I mentioned, and we will reward our shareholders. And I think we have the opportunity to be very good providers of long-term total shareholder return for our shareholders. We did say that heading into the merger and coming out of the merger that we are very firmly on a 10% Tier 1 capital because of the risk that we could see. We didn't forecast COVID, but we did know that there was a lot of risk built into the system because we've been in a 10-year very robust, strong economy. And we did think that unforeseen things happen, which, of course, they did. And for that reason, we felt it was prudent to hold a very strong 10% level. Now we have said for several quarters and I would reaffirm that as we go forward and as risk subsides, and it is subsiding for Truist on a daily basis, the economy is getting better, COVID is getting better. Our risks are going down because of conversions that are happening on a regular basis. As those aggregate risks continue to subside, that gives us the opportunity to think about the level of capital that we have to hold, meaning there's opportunity to consider lower than a 10% Tier 1 common equity ratio.

Well, great. We've run out of time, Kelly, and I really sincere thank you for being a great supporter of RBC in our conferences. I know this will be your last one as CEO at our conference, and you'll certainly be missed. But really, thank you so much for today and all the support in the past. And obviously, we'll be talking before the September 12, but I wish you well.

Thank you, Gerard. I appreciate that. It's been a good 49 years coming up on 50, and I've enjoyed working with you and look forward to seeing you many times in the future.

Same here, and thank you, Daryl.

Thanks, Gerard.

Take care.